Home purchasing is one of the biggest investments people will make during their lives, yet many don’t have enough savings saved up for an outright purchase so they take out a mortgage instead.
Mortgage 101 will help you navigate the complexities of home loans in an informed way to make an informed decision about home financing.
What is a mortgage?
Mortgage loans provide buyers with funds needed to buy homes and other forms of real estate. With its mortgage as collateral, buyers are typically required to repay it over an extended period of time – usually 30 years.
There are various kinds of mortgage loans, from fixed and adjustable rate mortgages, conventional conforming conventional loans, jumbo loans, FHA and VA loans; each one designed to help consumers realize their homeownership dreams. Each mortgage product comes with specific requirements but all aim to make homeownership possible for consumers.
At first, the mortgage process may seem complex to new homebuyers; however, having a better understanding of a few key terms will make the experience less daunting. Mortgages consist of four essential parts – loan principal, interest, property taxes and homeowners insurance (PITI). Closing costs and prepaid expenses may also be included depending on which loan product or lender is chosen and/or may incur extra costs that vary based on loan type and provider.
Types of mortgages
When selecting the appropriate mortgage loan, be sure to consider all available options and consult a professional. There are a wide variety of home loan types such as conventional, conforming, nonconforming, government-backed jumbo interest-only and payment option ARMs from which you can choose.
Conventional mortgages are funded by private lenders and follow guidelines set by Fannie Mae and Freddie Mac that require that borrowers meet specific income and down payment requirements; these loans are known as Qualified Mortgages.
Government-backed loans such as FHA, VA and USDA loans provide prospective homeowners who do not meet conventional loan criteria an avenue for homeownership, such as those with lower credit scores or recent blemishes on their record, to obtain lower interest rates than conventional loans. Other complex types of mortgages like interest-only and payment option ARMs tend to be reserved for more savvy borrowers – these may feature balloon payments at the end of each term while some ARMs can include caps on how much the interest rate changes during an adjustment period or over its lifespan.
Interest rates
Your mortgage interest rate depends on numerous variables both within and beyond your control, such as housing market trends, inflation rates and Federal Reserve monetary policy decisions. Furthermore, personal finances such as income levels or type of home loan you choose also play a part in how much interest is charged on it.
Mortgages are home purchases that require monthly payments (comprising both principal and interest) until either your loan balance has been fully paid back to the lender, or they take ownership (also known as foreclosure). There are numerous different mortgage products available; 30-year fixed-rate and 15-year adjustable rate mortgages are the two most frequently chosen ones.
Many people conflate interest rates and APR, which is the total cost of borrowing including costs such as broker commissions, application fees, title insurance premiums and any additional charges associated with borrowing money. APR should not be confused with interest rate alone but with all costs related to borrowing such as fees like broker commissions, application fees and title insurance premiums which must all be factored into its calculation.
Payments
Mortgage payments consist of two main elements, principal and interest. Your principal payment reduces what you owe while interest is charged by lenders for borrowing money from them. In some cases, mortgage payments also include private mortgage insurance and homeowners’ insurance – sometimes collectively known as “PITI”, meaning principal, interest, taxes and insurance payments.
Not many home buyers can save tens of thousands for down payments; therefore, mortgages provide them with access to homeownership. Understanding their operation can help prepare you for your own home-buying journey.
Shopping around for the best mortgage and loan terms available to you is key when purchasing a home. Get advice from friends, real estate professionals and banks as you search. Once you find one you like, request pre-approval so sellers know you’re serious about buying. This can expedite the home-buying process while alleviating stress later on.
